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ndonesia’s deeper integration with the global financial market, following its sovereign credit rating upgrades at the start of the year, has brought about meaningful investments but, at the same time, has increased the economy’s vulnerability to external shocks, say analysts from the Royal Bank of Scotland (RBS).

RBS’ head of rates and foreign exchange strategy, Chia Woon Khien, said on Tuesday that strong foreign fund inflows had become Indonesia’s weakest link in the first quarter of this year as the decreasing appetite for risk among international investors saw foreign funds retreating.

“With an overhang of foreign funds in the market, the Indonesian government’s bond market struggled to retain global investors’ interest,” Chia said at a seminar on Indonesia’s economic outlook in Jakarta.

According to a recent report of government bond ownership dated March 22, foreigners hold 29.66 percent, or Rp 225.52 trillion out of a total of Rp 760.22 trillion worth of tradeable bonds. Meanwhile, banks hold about 38 percent of the total bonds.

The yield on the 7 percent bond, due May 2022, increased four basis points, or 0.04 of a percentage point, to 5.95 percent, according to final prices from the Inter Dealer Market Association as reported by Bloomberg.

Chia said the Finance Ministry’s decision to enter the global market by issuing bonds denominated in dollars, after the Indonesian recapitulation bonds ended their losing streak in early March due to strong global risk recovery, may be a counter-attack to the domestic market.

RBS’ head of emerging markets in Asia and foreign exchange trading, Stuart Oakley, said there were no doubts as to the structural strengths in Indonesia’s economy. However, he said, there were growing concerns for the rupiah and the government’s monetary policies.

“In the coming months, RBS sees downside risks continuing to outweigh the upside opportunities for the rupiah,” he said.

Looking ahead to the second quarter, RBS forecasts the rupiah at 9,400 per dollar, 9,350 in the third quarter and 9,300 in the fourth quarter.

The rupiah advanced 0.4 percent to 9,158 per dollar as of 4:19 p.m. in Jakarta on Tuesday, according to prices from local banks compiled by Bloomberg. The currency has declined 1 percent this quarter. One-month implied volatility in the rupiah, which measures exchange-rate swings used to price options, was unchanged at 8.25 percent.

RBS is predicting that surging oil prices and the government’s plan to increase domestic fuel prices will affect the country’s inflation rate.

Chia said Indonesia’s central bank would likely maintain interest rates at 5.75 this year. Meanwhile, inflation is estimated to rest at 4 percent in the first quarter, 5.3 in the second quarter and 5.4 in the third and fourth quarter.

“However, we are still waiting for the outcome of discussions on fuel subsidies. The figure may change as the central bank will fight for inflation, should the price of fuel increase, affecting the gross domestic product [GDP] growth forecast. It’s also unclear what the central bank will do about interest income,” Chia said.

With the developed world in a multiyear deleveraging process, emergency monetary policy responses should be viewed as temporary palliatives, she added.

Also speaking at the seminar, Deputy Finance Minister Mahendra Siregar said Indonesia deemed it necessary to reduce the impact from a protracted global economic slowdown by limiting growth reliance on exports and improving its domestic consumption.

“Increases in the government’s corporate and public debts also confirm that export-oriented economic growth is no longer acceptable ... The 1997 crisis gave birth to our reform era; now, we see crises in other economies. This could provide the momentum for Indonesia’s second round of reform,” Mahendra said.